Don’t do a ‘WeWork’: Why tech entrepreneurs need to learn the lessons of 2019
Annemie Ress, UK MD at innogy Innovation Hub looks at why tech entrepreneurs need to learn the lessons of 2019.
2019 has been a bruising year for technology firms.
Several major US technology firms are the subject of antitrust or competition investigations; China’s Huawei has been one of the high-profile victims in the US-China Trade War; a raft of high-profile IPOs have been shelved, including the much-anticipated floatation of WeWork; and even the FAANGs – the darlings of the stock market - have reported results that have been below analyst expectations.
Commentators are questioning whether the Tech bubble is about to burst and investors have been warned to be cautious about which firms they buy into in the current conditions, with share prices for many tech businesses performing poorly.
Taking a step back, tech stocks tend to be particularly sensitive to investor nervousness because they typically trade on very high premiums. Many are still pre-profit and their valuations often dwarf revenues in anticipation of future earnings.
The investor frenzy that surrounds many tech giants and rising stars is testament to the huge potential they have to re-shape the way we all live, work and interact.
However, while the ideas, communities and IP that lie behind many tech industry successes is undeniable, the way these companies are run is increasingly becoming the subject of intense debate.
The storm around corporate governance at WeWork was one of the key reasons that led to the shelving of its IPO. Other tech stars, including Facebook, have faced bruising political encounters and scrutiny for their corporate governance and management processes.
While tech entrepreneurs often look like they operate in another stratosphere and play by another set of rules, they are still running businesses like any other. Attracting stable investment and maintaining funding and customer loyalty demands that tech firms follow the same conventions and best practice as any other leading business organisation.
Sometimes that looks to be lacking. The reasons for this are numerous. Often tech stars have grown at breath-taking speed, building their customer base far faster than their corporate culture can keep up with. Fast-moving entrepreneurialism also often requires a slightly anarchic start-up mentality that can be somewhat at odds with corporate governance controls, compliance and business process.
Founder Syndrome – where an entrepreneur or group of entrepreneurs wields huge power as majority stakeholders and the ‘face’ of a business, can also make it hard for best practice management to infiltrate. Sometimes the founder needs to step to one side, or share power, to create a corporate governance structure that turns a tech sector star into a stock market icon.
For tech entrepreneurs and investors looking to create and nurture the next wave of entrepreneurial start-ups, the lessons of 2019 should be heeded.
To avoid the perils of ‘doing a WeWork’ entrepreneurs have to seek professional advice and ensure that the corporate structure and governance of their company stands up to scrutiny. Behaving like a listed company in waiting should be the aim of any tech firm moving into and beyond the growth phase.
Equally, the founders of the business have to operate under the same conditions of scrutiny and corporate governance best practice as their peers at more traditional listed businesses.
While the temptation to cash in on the success of the business is great, and entirely justified, it must be done in the right way to preserve value within the business and ensure that future investors who are undertaking due diligence on the firm are not spooked by what they see.
The experience of former WeWork CEO Adam Neumann should serve as a warning to others.
In the thirst to secure rapid growth and find ways to monetise a great idea, tech entrepreneurs need to be open to challenge. They should actively seek the difficult questions and all decisions should be taken on the basis that they will stand scrutiny in the media and money markets, as well as passing the public confidence test in years to come.
Mark Zuckerberg continues to face bruising political encounters for the Cambridge Analytica episode, most recently from Alexandria Ocasio-Cortez. The question of what controls Facebook has in place, and should exert, over the way its data and platform is used is a recurring theme that casts a long shadow over the social media giant’s business.
For start-up business owners and entrepreneurs aspiring to build the technology giants of the future, the lessons of the past year should guide the support and funding they seek from the very beginning.
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Great ideas alone are not enough to build a great business. When entrepreneurs seek funding they should also seek advice, mentoring and collaboration to help them build a sustainable business that stands up to scrutiny. As well as building their product and their customer base, they should also be building a corporate governance structure that meets the standards that stock markets, media and analysts will use to judge the firms they invest in.
While the requirements for first and second round fundraising may be less demanding than that required for a firm seeking an IPO, this shouldn’t mean that entrepreneurs take the easy option and simply kick the governance can down the road.
Unpicking past decisions is a costly and time-consuming process. As the WeWork IPO delay shows, you don’t want to have to do that under the glare of public scrutiny and against an impending business critical deadline.
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